Is your business growing too fast? Why are outside investments sometimes a bad idea? Should your expenditures be based on projections or actual revenue?
Business growth is exciting and feels like success. But, there’s such a thing too much, too fast. In Company of One, Paul Jarvis identifies two negative consequences of fast growth that your company could experience: (1) damage to the relationships with your original customers and (2) outright failure.
Keep reading to learn about the potential pitfalls of rapid business growth.
Pitfall #1: Fast Growth May Harm Your Original Customers
Is your business growing too fast? Jarvis states that fast growth often leads you to make compromises that can harm your relationships with your original customers. Rapid growth typically requires outside investors, which means you have to answer to people beyond yourself and your customers. Investors want returns on their investments, so they bring their own opinions and agendas to the company, some of which may not align with its original mission and goals. If you have investors who don’t support your company’s purpose, you may have to make changes that please them but also alienate your core customer base.
For example, say your company offers prerecorded online cooking classes. From the beginning, you’ve been dedicated to keeping the videos ad-free, and many customers choose your classes because of this feature. However, you bring on some investors who want the company to grow quickly, so they push you to include ads that bring in more revenue. You finally give in, which pleases your investors. It also damages your relationship with your customers since you went back on your original promise, leading to losses in subscribers.
|Scaling Customer Service Without Losing Quality
According to some business experts, fast growth doesn’t have to mean your customer relationships suffer. To ensure this doesn’t happen, scale your customer service along with the other aspects of your company. That way, even if customers aren’t happy with the changes your investors push you to make, you have a strong infrastructure for responding to their complaints and hopefully overcoming their concerns.
To scale your customer service, first, determine consistent internal metrics for top-quality service with your team every time your team grows.
Then, refine your customer service processes. For example, design your company’s contact page so it guides customers to ask specific questions. Specific, clear questions are much easier for customer service workers to answer than vague ones, so they spend less time on each query.
Additionally, hire a larger customer service team and invest in thorough training so you have a clear standard for performance.
Finally, expand the knowledge base that’s available to customers so they can handle some of their issues on their own. Having robust help pages saves time for you and the customer.
Pitfall #2: Fast Growth Often Leads to Quick Failure
Jarvis argues that, companies that attempt to grow substantially in a short time (such as startups) often fail. This is because they spend money they don’t have to facilitate growth. Owners are motivated by the traditional business ethos that success means scaling up and making as much money as possible. So, they spend based on projected revenue instead of their actual revenue, thinking that they’ll recoup it soon enough to keep spending and growing.
(Shortform note: According to some business experts, overspending and scaling rates aren’t always primary or inherent reasons startups fail (though they may contribute to that failure). Often, startup problems stem from inexperience and bad relationships among company stakeholders. Founders of startups aren’t always experts in their company’s industry, so they may need to depend heavily on employees for expertise in handling major aspects of the business. If those employees don’t do a good job, the company may falter. Likewise, without founders experienced in the industry, startups may struggle to connect with the right suppliers to ensure their products are high quality and made efficiently.)
When a company spends money based on projections instead of current revenue, it’s a gamble. If their upfront spending pays off, then they have a large, successful company that they can continue to expand or sell. However, if their revenue projections don’t match the actual revenue (which is statistically the more likely scenario), they’re unable to recoup what they spent, and the company collapses. When a high-growth company fails, huge layoffs usually follow, and the company often sells for well below its market value.
For example, Australian startup Shoes of Prey tried to scale by expanding beyond its original model as a web-based custom shoe design service by opening physical stores in malls across the world. With an influx of venture capital funds, the owners spent huge amounts of money, moved to the United States, and hired a lot of new staff to get the project going. However, their sales from the physical stores didn’t match projections, so the company couldn’t generate a return on its investments. This resulted in massive layoffs and its collapse in 2018.
|When Startups Are Likely to Fail and What Happens When They Do
Most startups depend on outside investors to raise the money necessary to spend and grow quickly, and they may conduct multiple rounds of funding. During rounds of funding, startups trade shares of their company in exchange for capital (the money used to build, run, and grow a business), which they can use to take their company to the next level.
In one study, after startups secured enough funds to launch, only about 40% made it to the next round of funding. The number of startups that kept receiving funding decreased nearly exponentially with each subsequent round of funding—by the sixth round, only about 1% remained.
Failure and collapse weren’t the only reasons the startups didn’t continue to secure funding—some of them were purchased by other companies. About 92% of the startups that were acquired made it through at least the third round of funding.
When startups like the ones in this study do fail, in addition to conducting layoffs and looking for possible buyouts, the company will likely file for one of two types of bankruptcy. If a company files for Chapter 11 bankruptcy, it’s requesting that the court keep creditors away until it has a chance to submit a plan for how it can recover. The company then has the chance to reduce costs and potentially continue doing business. The company may or may not succeed after this. If a company files Chapter 7 bankruptcy, it means the company has collapsed entirely. Its assets are liquidated and used to pay off remaining debts.